We use cookies to deliver our online services. Details of the cookies we use and instructions on how to disable them are set out in ourCookies Policy. By using this website you agree to our use of cookies.

The item you have requested is not currently available in English and you have been redirected to the next available page. You may use your browser's back button to return to the item you were viewing.

On 16 November 2016 the Sejm (lower chamber of the Parliament) adopted a bill to amend the VAT Act and certain other statutory laws, calling for numerous changes in the VAT Act and the Criminal Fiscal Code, among other laws.

With 125+ locations in 50+ countries, Dentons is home to top-tier talent that is found at the intersection of geography, industry knowledge and substantive legal experience. Working with Dentons, you will have the opportunity to learn from the best lawyers in the industry at the largest law firm in the world.

Dentons is proud to congratulate our six lawyers who are listed as “Canada’s Leading Litigation Lawyers” by Lexpert, in its 2016 special edition that profiles Lexpert-ranked lawyers in several areas of business-related litigation.

Dentons Rodyk & Davidson LLP, part of the world’s largest law firm, Dentons, is pleased to announce that John Dick has joined the Firm as part of its Energy, Resources and Infrastructure practice and its South East Asia regional practice.

Debates on the procedure for calculating maximum interest for the application of thin capitalization rules (art. 269.2 TC RF) have been going on for some time. This issue is regularly brought up by the tax authorities during audits and is frequently the subject of litigation in thin capitalization cases. Judicial practice on this matter is also characterized by inconsistency.

The provisions of art. 269.2 TC RF are drafted in a way that is open to varying interpretation. Given the way in which the profit tax base is calculated, two alternative approaches to calculating the maximum interest have formed:

Cumulative total method. In this method, the maximum interest included in expenses for profit tax purposes is recalculated at the end of the first quarter, six months, nine months, and calendar year (tax period), on the basis of the controlled debt/equity ratio on each of the said dates. This recalculation affects the entire amount of interest accrued for the respective period (first quarter, six months, nine months, and year). In this approach, the maximum interest that can be booked as costs for profit tax purposes is finally determined on the basis of the controlled debt/equity ratio at the end of the year.

The alternative method of calculating maximum interest, which is in most cases used by the Russian tax authorities, is the so-called “discrete method”. In this method, the maximum interest on controlled debt is again determined on the basis of the controlled debt/equity ratio at the end of the first quarter, six months, nine months and calendar year. However, the significant difference between the cumulative and discrete methods is that the interest determined for a specific quarter is not recalculated. That is, the controlled debt/equity ratio for six months, nine months, and the year affects only the interest calculated for the second, third, and fourth quarters, respectively.

As the courts have not developed a uniform approach to the problem under consideration, the intrigue as to which way the highest court would lean was maintained until recently.

In the ZAO ER-Telecom Holding case (Decision of 17.9.2013 No.3715/13), the SAC Presidium supported the application of the discrete method. The court based its choice on the following arguments:

The court cited clauses 1 and 2 of art. 328 RF TC, in accordance with which interest is counted pursuant to the conditions of the loan agreement and subject to the restrictions established in art. 269 RF TC on the date the interest is booked as an expense for profit tax purposes, which in accordance with art. 272.8 RF TC is the reporting period to which the interest relates.

The court also interpreted the cumulative total principle for forming the profit tax base (including expenses) as meaning the simple addition of the expenses calculated for reporting periods (quarters) in a tax period (year), without recalculation upon the results for the tax period. This interpretation was given with respect to interest, but it is not clear whether it should apply universally to all kinds of expenses and income.

The court held that the rules of art. 269.2 RF TC preclude the application of the cumulative total method. The RF SAC Presidium has effectively qualified art. 269.2 TC RF as a special rule with respect to art. 318.3 TC RF, which establishes that a cumulative total is used for the purpose of calculating standard maximum amounts of expenses which are deductible subject to statutory limitations.

Consequences for taxpayers

The SAC Presidium’s ruling raises the following practical issues for taxpayers:

Taxpayers that have been using the cumulative method to calculate maximum interest need to recalculate the interest booked as expenses using the discrete method for at least the three preceding years open to tax audits.

Taxpayers that have used a one-time increase in equity at the end of the year to avoid the application of thin capitalization rules will need to reconsider their tactics.

Taxpayers will need to decide whether it is possible to apply the approach stated by the RF SAC Presidium in Decision No.3715/13 with respect to the cumulative total principle to other expenses with limited deductibility (advertising, insurance, etc.). In some situations it may be beneficial to the taxpayer to calculate expense limits with a cumulative total (for example, when the taxpayer does not reach the limit in some periods, but exceeds it in others), and in other situations use of the discrete method may be more favorable (for example, if the taxpayer has made losses in certain reporting periods). In this connection, the SAC Presidium’s ruling essentially causes uncertainty over the approach to limiting deductions of standard expenses. It is likely that in situations where the circumstances make it more favorable for the tax authorities to use the discrete method they will assert that the legal position in the Ruling on the ZAO ER-Telecom Holding is universally applicable. In situations where the cumulative total method is preferable for fiscal interests, the tax authorities will try to limit the application of the Decision by citing the special features of thin capitalization rules.

Disclaimer

Unsolicited emails and other information sent to Dentons will not be considered confidential, may be disclosed to others, may not receive a response, and do not create a lawyer-client relationship. If you are not already a client of Dentons, please do not send us any confidential information.